The sword and the shield: Building an offensive and defensive IP portfolio

A company’s innovations and other intellectual property assets are keys to success, so protecting innovations can be crucial for businesses of all types across all industries. Developing a strong IP portfolio enables a business to not only create new long-term revenue streams and return value to stakeholders, but also protect and improve market position. Good IP portfolio management requires a holistic approach with ongoing evaluation to identify opportunities and threats. A basic offensive strategy protects a businesses’ core technology and drives profits. Meanwhile, a defensive-minded strategy looks to capture unclaimed territory surrounding core technology by patenting incremental improvements, which builds value, blocks alternative designs, ensures freedom to operate, and shields against attacks by competitors. The offensive and defensive IP strategies are not mutually exclusive — ideally, many assets within the IP portfolio can be used both offensively and defensively.

The offensive IP portfolio

A patent owner has the exclusive rights, for a limited time, to make, use, sell and import the patented item or process. The patent owner may grant one or more of those rights to another under a license. Patents covering essential features of original technology are the crown jewel of intellectual property. Patents like these can be used to launch a successful product, supplement operating revenues during down times, or even turn a profit without making anything at all.

For example, pharmaceutical companies use offensive patent portfolios to protect new drugs they bring to market. It takes on average 12 years to bring a new product to market from invention to the pharmacy. With only 1 in 5,000 products making it to market, the average cost for research and development per product is over $1 billion. Drug makers rely on their offensive patent portfolios — patents on essential features of the new product, such as its active ingredient, formulation, and method of use — to ensure market exclusivity for a time. This allows the drug companies to recoup their investment, establish market share, and earn profits.

Trademarks protect against consumer confusion as to the source of the goods and can last indefinitely in the right hands. A strong branding philosophy effectively utilizes trademark protection to build goodwill during the early days of a product or service, such as during the early life of a patent, and enforces the trademark beyond the protection patent law provides. Eventually, patents expire or a competitor will succeed in invalidating or designing around the patents. By that time, the product will have established market share and can continue to compete through branding even after patent exclusivity has ended. A branded drug, for example, will usually have a made-up name like Viagra®, Abilify®, or Lunesta®, which the generic newcomer generally cannot use without permission. The trademark, and overall brand identity, provides the opportunity for offensive licensing of an authorized generic to capitalize on the goodwill and brand recognition built by the “non-generic” drug manufacturer.

To successfully build a strong offensive IP portfolio, a company must partner with counsel skilled in intellectual property to carefully map out the essential features of not only its products, but its competition. IP mapping of your own products, including improvements, within your industry ensures that innovative features cannot be freely copied, while charting the competition identifies potential infringement and licensing opportunities.

Texas Instruments is famous for successfully licensing its vast patent portfolios. Once the largest semiconductor maker in the world, TI lost market share to rivals in the 1980s. In response, TI began supplementing its declining operating revenues by aggressively asserting its patent portfolio and licensing key technologies to competitors. The strategy paid off. TI was able to capture billions of dollars in licensing revenues while transitioning its research and development toward new technologies.

Adidas is famous for its apparel and sportswear. It invested heavily in the marketing of its Three Stripes Design mark to ensure that consumers identified that mark with Adidas in the sports equipment and apparel markets. Since fashion design typically is not eligible for patent protection or copyright protection, Adidas has utilized its multiple trademarks to protect and enhance its market position and earn additional revenue. For example, in 2008, Payless ShoeSource was ordered to pay $304.6 million (later reduced to $64.4 million) to Adidas, when Adidas successfully claimed that Payless ShoeSource sold shoes and sportswear that were confusingly similar to the Adidas “Three Stripe Mark” and “Superstar” trade dress.

Another frequent offensive use of patents is by non-practicing entities, which are often called NPEs or patent trolls. NPEs do not make any products, but license their patent portfolios to operating entities. NPEs come in all types and sizes from the lone inventor in his garage to multi-billion dollar patent aggregators and consortiums. Examples include:

Intellectual Ventures, a self-termed invention investment company and one of the top five holders of U.S. patents. IV has acquired over 70,000 patents, mostly through purchases, and makes its money by licensing technology to operating companies in virtually every technology sector.

Acacia Research, a publicly traded patent licensing company with 160 different patent portfolios across all industries. Acacia licenses and enforces through various subsidiaries.

Rockstar, a patent consortium funded by tech giants Apple, Microsoft, Sony, Ericsson, and RIM. Rockstar paid $4.5 billion to buy Nortel’s patent portfolio out of bankruptcy in 2011 and has since begun aggressively enforcing the patents against Google, Huawei, Samsung, and others in the handset space.

Offensive licensing does not just apply to patents and trademarks. Copyrights also are valuable components to an IP portfolio and can also be offensively licensed. For example, professional and collegiate sports associations have entered into multi-billion dollar licenses with major television networks for copyrights to broadcast games. Recently, photographers filed suit against the NFL over use of photographs, having snapped pictures as freelancers under what are known as speculation agreements, which allow photographers to retain control over images and then license out those that they can. The photographers claim the NFL owes royalties for use of their images. Assuming that those images were registered at the U.S. Copyright Office in advance of infringement, the statutory damages associated with the infringement can be a significant award to the photographers.

Defensive IP portfolio

While the offensive IP portfolio can drive additional revenue sources, the defensive IP portfolio can protects a company’s future development path for continued growth and expansion. Often a business will explore ideas and solutions that — for one reason or another — are not incorporated into its products. Securing protection for these alternative solutions can be worthwhile, leaving competitors with fewer and less desirable design-around options.

Pursuing a patent ensures that the innovation is available to use in other products or applications down the road. For example, if another company patents an improvement to your product, it will inhibit your freedom to operate. By the same token, if you obtain a patent on an improvement to a competitor’s technology, it can be a valuable bargaining chip.

For this reason, good portfolio management requires monitoring of your competition’s patent holdings to identify opportunities and threats. For example, a company may be able to design around a competitor’s patents or initiate a reexamination proceeding against an overly-broad patent. This can be an aggressive alternative to waiting for litigation. In addition, due to the speed with which many companies must develop and move a product to market, those products may contain one or more elements that infringe a patent within your portfolio.

Identifying opportunities for incremental advancements in technology is important for building a cluster of patents around critical technology. It requires good communication between patent counsel, product developers, and sales people who know which features are likely to drive market demand. By covering your products as well as filling in opportunity space (i.e., open spaces around your products), you create potential infringement problems for competitors. Having a defensive patent portfolio can provide a company leverage for negotiating cross-licensing agreements and provide valuable ammunition if faced with a charge of patent infringement by an operating entity. This is somewhat like the Cold War-era nuclear deterrent strategy of mutually assured destruction. Even outside the competitor arena, a critical mass of relevant patents can even be useful in deterring and fending off suits by NPEs, both as a source of potential prior art and from a jury-optics standpoint by showing that your company has, in fact, developed and patented its own technology.

The number of patents held by a company can also make a business attractive to investors. For example, IBM has successfully advertised the large number of patents it obtains each year as part of its overall marketing strategy, taking out full-page ads in major newspapers. For a small company, the patents and technology it develops are often its most valuable asset and the incremental cost of adding additional patents in surrounding areas around critical technology is relatively low compared to the potential returns from investors and buyers. Google and Facebook have recently paid billions to buy companies like Nest, WhatsApp, and Oculus VR — just because they have interesting technology and intellectual property.

A related defensive patent strategy involves buying or licensing patents portfolios that may become available. Google purchased Motorola to help shore up its intellectual property surrounding the Android mobile operating system. This was a defensive move for Google as it bought a struggling handset maker because of its highly valuable patents and technology in an area surrounding the Google Android operating system. Likewise, licensing companies — like RPX — are available to license large patent portfolios (or portions of portfolios) to operating companies that may not have developed all their own technology. Joining one of these patent portfolios provides an operating company some of the benefits of a large defensive patent portfolio.

The same principles apply to other forms of intellectual property as well. For example, King.com, the publisher of the popular mobile app Candy Crush Saga, has become vigilant about policing the publication of new trademarks at the U.S. Patent and Trademark Office to prevent copycat games from cropping up in the mobile game world. This usually means going after upstart game developers that use marks similar to those owned by King.com for similar goods and services. The same policing activities occur in the copyright space with music labels and pay per view promoters going after unauthorized distribution of their content. Established companies will also frequently see content from their websites and marketing materials being copied by competitors, which may be a form of unfair competition. As these examples illustrate, good intellectual property portfolio management requires ongoing attention to not only identify opportunities but also to guard against unauthorized use that would dilute intellectual property rights and lower their value.

Conclusion

Any company that develops new products or services, from startups to established market leaders, should carefully analyze and consider its opportunities to leverage offensive and defensive intellectual property strategies. The hallmark of a successful company is the amount of infringement and counterfeiting it sees across all types of intellectual property. Active communication among the lawyers, product developers, and sales people is critical for protecting innovations and returning value to stakeholders. Above all else, good IP portfolio management starts with good IP counsel capable of identifying and delivering on IP needs across multiple platforms and in multiple stages from planning to prosecution, management, and enforcement.